As tax refund checks are starting to be mailed out, one of the things it can help you do is build credit. There is a good chance that as you try to manage your finances, you get overrun by all the many curve balls life throws at you. This can lead to missing payments or getting behind some of the payments which can lead to lower credit scores and bigger succeeding payments.
Thestreet.com shares that the average tax refund check being mailed out is around $2,800. That is a huge amount of money that is coming in. Though the topic of whether it was better not to overpay at all is still an ongoing discussion, getting this amount is still a shot in the arm. The next thing you need to do now is figuring out how it can help your finances.
One of the first things that should come to mind is your credit score. This three-digit number is your financial scorecard and used by lenders to assess your creditworthiness. The higher this number is, the better your finances are and the more benefits you can enjoy from your lenders. This can be in the form of lower interest rates on some loans and even pre-approval on some of your loan applications.
However, the lower your score is, the more challenging it is for you in the long run. As your score and interest rates are directly proportional to each other. The lower your score is, the higher your rate could be. This is why improving your credit score and maintaining a decent number should be a priority when managing your finances.
When you get a tax refund, here are some of the ways you can build credit and put your finances in a better position for the future.
Catch up on debt payments to build credit
One of the most important aspects of your score is being able to meet the payments on your financial obligations. To help you build credit, you need to consider catching up on your debt payments. As the activity on your accounts is reported to the credit reporting bureaus, choosing to use part of the money to get up to date can benefit your credit score. As you get current on your past due payments, it also allows the chance to manage your financial stress.
Pay your credit cards
One of the best things you can do with your tax refund money as you build credit is to pay down your cards. As you try and catch up with other debt obligations, there is a reason why you need to focus on you cards as well. It is for the simple reason that your credit cards would most likely carry the higher interest rates among all your debt accounts.
Paying them down will not only help your credit score, it will also allow you to save money down the line. This is because you are able to steer clear of interest payments for the card. You can then use that money to strengthen various funds you have. It can be for your emergency fund, retirement fund or even your 529 plan for your children.
With this in mind, it is best to audit your credit cards and determine the ones with the highest rate. You then have the option of prioritizing payments on these cards of transferring them over to other cards with lower rates. Bottomline, you have to be strategic when paying down your cards. You do not just go blindly and pay what you can. It is important that you consider several factors such as interest rates.
Explore a secured credit card
This is one strategy which can help you improve your credit score without taking out any loans to pay back. USAToday.com explains that a secured credit card usually requires a deposit which is essentially your credit limit. You can then use that amount as you shop and pay the same to your lender. As you do this, your payment gets reported and helps improve your score.
You can also explore looking at secured credit cards that can later on transition to unsecured cards. This can be helpful as it would carry a lot of on-time payment history. This carries a lot of weight on your total credit score computation. The more you take care of this card in terms of payment, the more positive impact it would have on your credit report.
Though if you already have a card with a lot of payment history on it, you do not have to consider this route. It can help but it can also add to your temptation. This is because it gives you a higher credit limit when combined with all your other credit cards. When push comes to shove and you do not have an emergency fund, you might end up using these cards to simply cover the debt.
Look into a credit builder loan
This option is a lot similar to a secured credit card in the form of a loan. This can help you build credit because as you make payments on the secured loan, it gets on your credit report. The way it works is that the money borrowed is secured in an account held by the lender who will give you the loan. The limit would also be the amount you have secured.
Over the course of a few months, you pay them back until it amounts to the funds you have secured with the lender. The lender then provides you access to your secured funds. As you receive your tax refund check, you can use this amount as your secured fund in taking out a credit-builder loan. You get to save the money and build up your credit score in the process.
Get a debt consolidation loan
One of the reasons why you might be suffering from a low credit score is because you are having problems keeping up with your payment schedule. One of the things you can do is to look into a debt consolidation loan and start off with a clean slate. The question now is how does your tax refund help you do this while you build credit as well?
What you can do is use your tax refund money to start off your monthly payments in your debt consolidation loan. This can set you off on the right path and give you enough elbow room to adjust your finances. It can help you with your credit score because you can clear up and lower down credit utilization ratio. It can even help you pay off your debts.
Build up your reserve funds
This does not have any immediate effect when you plan to build up your credit score. However, this helps you protect whatever score you have from further dipping lower. As mentioned earlier, you tend to use your credit cards when faced with financial emergencies. This usually happens when you don’t have any reserve funds to speak of.
There could even be instances when you choose to take out signature loans or even payday loans. This can happen when you need some cash for emergencies. This is where you can use your tax refund check to start building up your emergency fund. You get to have a financial cushion in the future. This amount can offset for unexpected emergencies in the future and help you prevent taking in more debt.
There is no easy fix when you want to build credit. But there are specific steps you can take now especially with your tax refund check. The important thing is not to take on bad spending and payment habits after you have built up your score.